Outlook for tax extenders dims under funding agreement

The agreement to fund the government into 2024 narrows the options for passing a tax extenders deal to address business tax provisions such as the amortization of research costs under Section 174.

Congress last week averted a potential government shutdown with a short-term continuing resolution that extends most government funding through Feb. 2, 2024, with a smaller portion funded through Jan. 19. This robs tax writers of a key year-end legislative vehicle that could have carried tax priorities. Tax bills are notoriously difficult to move through Congress and any tax extenders bill will likely need the momentum from other must-pass legislation to carry it.

Lawmakers had been hoping to seize one last opportunity to strike a deal that would trade child tax credit enhancements for restoring research expensing under Section 174, reinstating 100% bonus depreciation, and providing relief for the Section 163(j) limit on interest deductions. Tax writers have recently renewed negotiations, and lobbying activity has geared up for a final push. A deal remains possible, but there are now several major hurdles.

The two remaining options for carrying an extenders deal appear to be an extension of Federal Aviation Administration funding that will be needed before Congress adjourns in 2023 or the government funding bills that are now not needed until 2024. The FAA bill included an extension of aviation taxes that would allow for other tax provisions to be added, but the bill is usually a noncontroversial exercise that lawmakers like to leave “clean.” There is not much precedent for using it to carry other provisions, particularly a tax extenders package that could cost as much as $100 billion and overwhelm and sink the bill.

Lawmakers could use the next two months to try and reach an agreement to attach to a spending deal in January or February, but pushing into 2024 creates complications. Lawmakers had originally hoped to provide retroactive relief going all the way back to the 2022 tax year, which begins to look less and less practical after 2023 ends. Several lawmakers are openly questioning how the tax provisions could have any incentive effect when applied retroactively. Campaign season will likely heat up in 2024 as well, making tax legislation even harder.

Cost remains a major issue. The Joint Committee on Taxation (JCT) has estimated that restoring all three business tax provisions and extending them through 2025 would cost nearly $50 billion. If Democrats demand equivalent child tax credit relief, the total cost could approach $100 billion. Lawmakers do not appear to be discussing offset so such an expensive bill could create issues with conservative Republicans, who have been harping on deficits as part of the spending fight.

Tax writers also appear no closer to an agreement on the child tax credit that would satisfy both sides. Democrats recently sent several proposals to JCT to score, but none seem to have garnered much Republican interest yet. The best hope may be a narrower package that only addresses Section 174, which enjoys the most Democratic support. The cost could be further reduced by only applying relief prospectively, which would allow a much smaller equivalent child tax credit proposal.

Taxpayers should keep an eye out over the next two months to see if Congress can pull together a last-minute deal, but it may also be appropriate to begin thinking about planning options to address Section 163(j) and Section 174 moving forward. Calendar-year taxpayers generally had to implement the changes for the 2022 return, but many may not have been able to assess proactive planning that could soften the impact.